How do you decide how much of your investments to put into stocks and how much to put into other types of investments?
Before deciding how much to invest in each, a little financial planning and self-examination is necessary!
Basically, there are five things you need to consider when trying to decide how much to invest in stocks and what to tuck away in other investments:
1. Your Age,
2. The Consequences for Your Retirement Planning,
3. Your Personal Comfort Level,
4. How Diversification Affects Risk, and
5. Your Overall Financial Goals
You start by placing your age into a formula, which tells you what percentage of your long-term investment money should be invested in aggressive growth vehicles such as stocks.
It Simply Is:
100 - YOUR AGE = The percent of your investment money that should be in aggressive growth investments.
This formula is straightforward and makes logical sense.
When you're young, you have time on your side!
If one of your investments goes in the tank, it may be upsetting at first.
However, you have many years before your retirement to rebuild your fortune before you actually need to touch the money.
The main risk you have to overcome when you are young is not losing your fortune, but not growing your fortune fast enough.
And this formula doesn't lie!
Clearly, when you grow older, more of your assets should be invested into conservative, income-producing investments such as bonds.
That's because when you're 50 years old you have a lot less time in the job market to rebuild your retirement fortune than when you're say a 25 year old.
This formula generally applies to money earmarked for retirement...
Or at least, money that you won't touch for 7 years or more!